Reading Lists

After taking a step back from a full-time operating role in health tech, I’m spending some time diving deep into the history of some of the most successful businesses that have operated in some of the most impactful industries in the US, as well as deepening my understanding of healthcare, and specifically the economics of healthcare. I’ve come up with a reading list that I’m going to work through over the coming weeks — 10 books on business history and 10 books on the economics of healthcare. Sharing it here. Feel free to send any recommendations!

Business History

Private Empire: ExxonMobil and American Power by Steve Coll

The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson

Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars by Dick Martin

Citizen Coke: The Making of Coca-Cola Capitalism by Bartow J. Elmore

Capitalism in America: A History by Alan Greenspan and Adrian Wooldridge

Disney War by James B. Stewart

The Fish That Ate the Whale: The Life and Times of America’s Banana King by Rich Cohen

Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local – and Helped Save an American Town by Beth Macy

Empire of Cotton: A Global History by Sven Beckert

Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry by David C. Robertson

Business of Healthcare 

Pricing Life: Why It's Time for Health Care Rationing by Peter A. Ubel

Catastrophic Care: Why Everything We Think We Know about Health Care Is Wrong by David Goldhill

Moneyball Medicine: Thriving in the New Data-Driven Healthcare Market by Harry Glorikian and Malorye Allison Branca

Redefining Health Care: Creating Value-Based Competition on Results by Michael E. Porter and Elizabeth Olmsted Teisberg

An American Sickness: How Healthcare Became Big Business and How You Can Take It Back by Elisabeth Rosenthal

The Innovator's Prescription: A Disruptive Solution for Health Care by Clayton M. Christensen, Jerome H. Grossman, and Jason Hwang

The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care by Eric Topol

Medicare Meltdown: How Wall Street and Washington are Ruining Medicare and How to Fix It by Rosemary Gibson and Janardan Prasad Singh

Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer by Shannon Brownlee

The Price We Pay: What Broke American Health Care—and How to Fix It by Marty Makary

Healthcare's Incentive Misalignment

Just under 15 years ago, I sat down in a conference room with one of my clients, the SVP of Benefits of a self-insured, Fortune 100 company. Like most large companies (his had about 300,000+ employees at the time), they were focused on reducing their health insurance costs as it had become an enormous line item for them that had the attention of their CEO. My company recently launched a product that helped large employers drive enrollment and engagement in voluntary benefit programs (things like smoking cessation, health risk assessments, fitness contests, nutrition counseling, etc.). Like many companies, my client had very low usage of these programs. I spent a few minutes telling him about our product, thinking that if we could increase usage of these programs, his employees would be healthier, bringing down their insurance costs.

Once I was done talking, he looked at me and told me the thing that large self-insured employers and health plans aren't supposed to say:

"Brian, the average employee's tenure at our company is 22 months. I don't want to spend time investing in driving usage in things that will make my employees healthy only to have them leave and have some other employer benefit from that investment."

And in those two sentences, he articulated the #1 structural problem with healthcare in the United States: incentive misalignment.

Misaligned Incentives

There are three major players in US healthcare: the patient, the provider, and the payer. And none of their incentives are aligned.

Patient: The patient's incentive is to live a long, healthy life.

Provider: The provider's incentive is to have lots of sick patients who need billable treatments.

Payer: The payer's incentive (or self-insured employer) is to cover lots of healthy patients who don’t get sick and don’t need treatment. But only for a short period. They only care if the patient is healthy while they're a member of their health plan. Members typically stick with the same plan for 2 to 3 years. Health plans have extremely high churn rates as employees change jobs, patients fall on and off Medicaid, move to lower-cost Medicare plans, etc. Payers don’t have a financial incentive to invest in the long-term health of the patient. They have no incentive to help the patient live a long, healthy life. In fact, they have a disincentive to invest in the long-term health of the patient if that payoff comes after the patient is no longer a member. This dynamic applies to the provider as well in a value-based care model where the provider is taking financial risk. 

To be clear, when I’m talking about incentives, I’m not talking about ethical incentives. Everyone wants people to be healthy. I’m talking about financial incentives. They are not aligned. And that’s a real problem, as payers and providers are businesses that need to make responsible financial decisions. 

For business models and systems to work well, they need incentive alignment. Take the iPhone ecosystem as a simple example. The user wants a great phone at a reasonable price with an unlimited number of functions. Apple wants to sell a lot of high-margin phones and high-margin apps. And the app makers want a huge audience to build apps for. It’s not perfect, but financial incentives are generally aligned, so this ecosystem thrives.

In a system full of problems, this lack of aligned incentives is the core problem in healthcare.

We need to get to a system where the entity caring for the patient and the entity paying for the care of the patient is financially aligned with the patient’s incentive to live a long, healthy life.

Solutions

Ideally, the government could help with some top-down structural changes such as incentivizing longer-term health investments through tax incentives, allowing plans to benefit from long-term preventative investments, or possibly universal coverage of some sort and changing the way care is paid for. However, a big change from the government will be difficult and come with its own complex set of sensitive tradeoffs. That said, It seems the use of HSAs, which allow employees to carry tax-free dollars that can be used for health expenses across employers, has expanded. I’m also very encouraged by the Individual Coverage Health Reimbursement Arrangement (ICHRA) that was launched in 2019, set up through a partnership between HHS, the Department of Labor, and the Department of Treasury, which allows employees to pick their plan outside of their employer and get reimbursed by their employer, allowing them to stick with the same plan as they change jobs. We need more of that. 

The private sector has a huge opportunity to address the incentive problem through real business model disruption. The word “disruption” gets thrown around a lot, especially in health tech. But disruption doesn’t just happen through new technologies. It happens through fundamental business model transformation that changes the way business is done. The hotel industry wasn’t disrupted by the Internet or even by early Internet companies like Orbitz, Expedia, and Kayak. Those services just changed the way consumers book hotels and the way hotels do marketing. AirBnB was actually disruptive by transforming a gigantic B2C business into a peer-to-peer business. That’s disruption.

Of course, these business model transformations take time, and they almost always start by focusing on a very niche part of the market and scaling up from there. We’re seeing some signs of this in healthcare:

Longevity-focused solutions such as Function Health and Neko Health give the patient more control and take a longer-term, consumer-focused focus perspective on health. 

Direct primary care models like Taro Health, where patients pay a flat fee for access to primary care services incentivizing providers to focus on preventative care for the long term.

In 2013, I wrote a post titled 15 Reasons Why Healthcare Has A Business Model Problem. Rereading it today, all of those problems still stand. Healthcare is a uniquely challenging problem for all of the reasons I listed in that post. And one thing I’ve learned over the years is that you can complain about it all you want, but when you have to turn your attention to solutions, you realize there simply are not great answers. It’s just a set of very complex, nuanced, and thorny tradeoffs.

As Charlie Munger said, “Show me the incentive, and I’ll show you the outcome.” The negative outcomes have been evident for years. While many of these approaches are early, and it’ll take time to get real traction, it’s exciting to see entrepreneurs focused on root cause incentive alignment to drive long-term and sustainable transformation. We need it now more than ever.

Benchmarks & Storytelling

The other day, a founder asked me about financial benchmarks for a company at his stage. He asked about the optimal CAC/LTV, gross margin, and revenue per employee. 

Benchmarks are important. Investors, particularly investors who don't have intimate knowledge of your company, will use them as a guide for how to value your company. There's a temptation for founders to optimize against top-tier benchmarks. But I think that's unwise. Optimizing against benchmarks is actually relatively easy. What's really difficult is knowing what your company needs right now and optimizing against that. That's a lot harder.

‘Revenue per employee’ provides a very simple example of this concept. Top-tier SaaS companies have a revenue per employee of around $300k. It's tempting to chase that number. The problem is that the easiest way to grow your current revenue per employee is to stop innovating. Get rid of all the employees working on stuff that won't impact revenue this quarter or this year. But that's likely not at all what your company needs right now for a variety of reasons.

So, in many cases, you actually don't want to optimize revenue per employee. That might not be what your company needs right now.

The best approach to this problem is to know your metrics and be aware of top-tier benchmarks but to intelligently apply those benchmarks to your business and be able to explain to an investor and your team why that's the right thing for you right now. A great story around why your revenue per employee is lower than a top-tier company because you are thinking about growth 3 to 5 years from now or why your gross margin is low right now because you're overly investing in your early customers, or why your CAC is high because your testing new marketing channels is a lot more impressive than a simple point in time comparison to benchmarks of companies that might need to optimize around something completely different.

Fundraising & Incentive Alignment

There was a really interesting discussion on the “state of venture capital” on the BG2 podcast this week. It's definitely worth listening to the entire episode, but here are three key insights for founders that I thought were worth highlighting, along with some brief commentary:

1/ $100M+ exits are incredibly rare but can be life-changing for founders. Taking 15% of a $100M exit is $15M—not bad at all. But if you've raised $100M in venture capital, a $100M exit is off the table due to the preference stack where VCs get paid first. If you've raised $500M, a $500M exit is off the table. $1bn, etc. Raising more money than you need makes great exits harder and harder to achieve. This is also true of valuations: a high valuation sets a new benchmark for success. There's an important trade-off between driving up valuation (so investors take a smaller portion of your company per dollar invested) and setting expectations so high that even a strong exit may not satisfy investors. I wrote a post a while back about how employees should think about this topic when joining a startup.

2/ Raising too much can lead to a loss of focus, spreading talent too thinly across initiatives. Companies often say they won’t use all the capital they raise, but that’s tough to avoid in practice. If you’re an entrepreneur with a bank full of funds and a head full of ideas, you’re likely going to pursue those ideas. The discipline to keep the money in the bank is inconsistent with the mindset of a creative, ambitious, high-growth leader. And early on, focus is everything, and it’s one of the major advantages a startup has. You only have a small team of top performers that can create outsized value, so spreading them too thin can significantly reduce their impact.

3/ The incentive structure in venture capital has shifted a bit, impacting the alignment between VCs and founders. The venture model, traditionally known as "2 and 20," means firms typically charge a 2% management fee and take a 20% carry (their share of profits when a portfolio company exits). In the past, venture capital was sort of a boutique asset class, with a few players managing smaller funds and relying heavily on that 20% carry to make a profit. Today, due to companies going public later and seeing more value creation in the private markets and the fact that starting a company has become much easier, venture capital has become a far larger asset class with more capital, more investments, and lower margins. As a result, that 2% management fee can become a substantial source of income — 2% of a $1 billion fund is $20 million per year. This structure incentivizes VCs to deploy capital more quickly as they don’t earn that management fee until the money is deployed. It's not a huge deal, but this can lead to some incentive misalignment between a VC and founder, so it’s worth being aware of.

Starting Up & Scaling Up: Turning Duct Tape Into Steel

I heard a great metaphor for building companies the other day.

When you start a company, you're scrambling, trying to find your way, and building lots of new things. You find that when things work, the company is held together with duct tape. A large part of the job in making it into a great company is turning that duct tape into steel so that it can sustain itself without requiring superhero levels of daily effort. It's worth stepping back to understand this metaphor and how the priorities of an organization change over time.

The Duct Tape Days

The "duct tape" days are tough. You have to tackle a bunch of new and challenging things: raise money, convince great people to join you, figure out how to build something new, find product/market fit, implement it, and make customers happy—along with dozens of other little things you need to do to get a company off the ground.

The hardest part of this phase is that you're breaking ground on something new. All along the way, you know in the back of your mind that it might not actually work. This is stressful and hard to manage. However, the best part of this phase is the high level of alignment with your team. You probably don't have many customers (if any), you don't have a lot of employees, and everyone is mostly rowing in the same direction. The highest priority for any given employee at this stage is the same (or very close to the same) as the highest priority for the company. That's a great thing.

When you get past this initial phase and find that you have something that works and that people want, you quickly start to encounter a new set of problems. Your problems shift from building something new to scaling it. And the better the company performs, the more problems you will have. If you talk to people at startups, most (actually, all) will tell you it's a sh*t show. The faster the growth, the bigger the sh*t show.

The reason is that a company takes on more commitments as it grows—commitments to customers, investors, governments, auditors, partners, vendors, and one another via cross-functional teams. In the early days of scaling, these commitments grow linearly with the company. All of these commitments are new, and the workflows to manage them must be built from scratch. You probably expected some of them, but you'll also discover commitments you never imagined at the outset due to the compounding complexity that comes with scale.

Scaling Up

To manage these commitments effectively, the company will soon start to split into teams and add managers, new job titles, and levels. This structure becomes necessary because specialized groups can more effectively focus on specific areas, make faster decisions, enhance accountability, communicate more efficiently, and take ownership of the new workflows built around the growing set of commitments.

Pretty soon, you have a structure and a long list of commitments and priorities that looks something like this:

• Finance: Budget management, financial reporting, cash flow management, compliance and audits

• Sales: Revenue targets, customer acquisition, CRM management, territory or account management

• Operations: Customer onboarding, process optimization, logistics and fulfillment, vendor management

• Product: Product roadmap, feature development, quality assurance, user feedback integration

• Marketing: Brand management, lead generation, content creation, market research

• HR: Talent acquisition, employee onboarding, performance management, employee development

That's a lot of duct tape.

Quickly, the distance between the highest priority for any individual employee starts to diverge from the highest priority for the company, and that distance only continues to grow over time. You start to have lots of competing priorities and people rowing in different directions.

Competing priorities naturally lead to confusion and miscommunication among team members, resulting in unclear roles and conflicting work. This misalignment often causes inefficiencies and duplication of efforts, as teams may unknowingly work on similar tasks independently. Frustration can build, decreasing morale and motivation among employees who feel their efforts are not well aligned with company goals. Decisions get delayed, and things might feel like they’re standing still, leading to missed opportunities and slowed progress.

Tech people like to lovingly refer to this as "thrash."

Ultimately, this thrash can lead to poor performance and poor culture.

Turning Duct Tape Into Steel

Companies need to get ahead of all of this natural and inherent side effect of growth. They need to start turning the duct tape into steel by putting goals, processes, metrics, and communication systems in place to ensure a high-performance standard against all of these new commitments. They also need to align the work being done with the company’s strategy and financial objectives. Tools like vision and mission statements, OKRs, company values, cultural principles, financial targets, team offsites, company-wide meetings, cross-functional meetings, accountability and reporting systems, and management processes need to be implemented to solidify strong systems and prioritization around the company’s commitments.

There are multiple frameworks and playbooks on how to do this well. However, every company is different, and each should publish and regularly communicate its systems to their teams. Doing this well can become an enormous competitive advantage over time. I’ll write more over time about some of the things I’ve seen work well.

The Cadence

One of the most common and dangerous areas of misalignment in this phase—particularly for b2b companies—is between product, marketing, and sales. In consumer-focused companies, a natural glue pulls these teams together. Often, there’s no sales team, and large parts of marketing are embedded within the product (algorithm-based merchandising, social sharing features, cart abandonment targeting, etc.). This glue doesn’t exist or is far less sticky inside a b2b company. In b2b, these teams are often separated under different leaders but are the commercial lifeblood of the company. The product team builds things that create TAM, the marketing team builds a pipeline out of that TAM, and the sales team closes that pipeline pipeline. Without tight alignment between these three teams, things can quickly fall apart.

To help manage this, one framework I love and highly recommend borrowing and wanted to highlight today is "The Cadence: How to Operate a SaaS Startup" as described by David Sacks in his somewhat dated but enormously valuable Medium post.

In it, Sacks recommends putting sales and finance on a shared cadence and calendar and product and marketing on another shared cadence and calendar.

From the post on the sales and finance cadence:

"Every company runs on a fiscal year as an accounting requirement. This finance calendar should be synchronized with the sales calendar for reporting reasons. When the books close on a fiscal quarter, the numbers should reflect a complete quarter’s sales activity, not an incomplete mid-quarter picture. The leadership and board will have a much better sense of what’s happening in the business if sales plans are snapped to fiscal quarters."

And on the marketing and product cadence:

"When rapidly scaling startups don’t have effective product management, one of two things happens. First, they just ship sand. They polish and fix bugs and usability issues, but they don’t ship tentpole features, new products, and major releases. Or when they do, they end up going wildly over schedule. A product that was supposed to take one quarter will still be in development multiple quarters later. ‘V2s’ that were supposed to take a couple of quarters end up being years late and paralyze the company. This happens because the product was never scoped correctly. The quarterly discipline ensures that you do big stuff—rocks, not just sand—while scoping correctly."

"None of this is to say that code can’t be shipped weekly or even daily for code management reasons, but PM planning should revolve around quarterly or seasonal releases. Now that you know there will be a major quarterly product release, you can plan marketing around that. This is why marketing and product are on the same calendar. Startups are product-driven, and most news that the company puts out will feed off of new product releases."

While I’m a huge fan of this approach, the brilliance isn’t necessarily in the details but in two very important concepts:

1. The notion of internal teams making solid commitments to one another and

2. Tying that commitment to a calendar and firm timeline.

Getting teams to hold one another accountable and rely on each other with specific timelines is a giant step in turning duct tape into steel.

That said, I’ve historically found that product teams can sometimes be reluctant to commit to firm timelines, as they’re described in this framework. Product development processes from companies like Google or Spotify often prioritize agility and rapid iteration to respond to changing user preferences and market trends. This can cause them to favor less rigid timelines, which makes a shared calendar with the marketing team challenging to operationalize.

Conversely, companies like Oracle or SAP, which deal with large customer expectations, integration requirements, buying cycles, budget cycles, and program cycles, require fixed timelines and have more structured environments. You can almost view Google and Oracle as two sides of a spectrum.

The right approach to this spectrum isn’t to be philosophical (e.g., is Google better than Oracle?) but should be based on the unique characteristics and attributes of the buyer and the way the product is bought, sold, and implemented. Before adopting this approach, I’d encourage all commercially focused teams to dive deep on this point.

Ultimately, every company is built on a foundation of duct tape in the beginning—it’s messy, thrashy, and fragile, and it feels like it could fall apart at any moment. It’s important to understand how and why this happens so you can get ahead of its pitfalls. The companies that succeed are the ones that learn to replace duct tape with steel methodically and with intention. Time-based, cross-functional accountability is an incredibly valuable tool and tactic to manage through this crucial transition.

Salesforce’s Pivot & The AI Business Model

Back in October, I wrote a post titled Selling Software vs. Selling Work, in which I noted that AI may begin to disrupt the traditional SaaS business model. As a reminder, the traditional SaaS business model allows software companies to sell their software as an ongoing service with annual recurring payments. Typically, the software is billed on a "per-seat" or "per-employee" basis. Pioneered by companies like Salesforce, this model has been enormously lucrative for large SaaS companies because they can grow as they sign up new logos, but they can also grow organically and naturally as their customers hire more employees (more seats). This has been a boom for the SaaS industry as most customers have grown headcount substantially over the last 10 to 15 years.

However, a large part of AI's promise is that it will likely eliminate a huge number of white-collar jobs, such that productive companies might start materially reducing headcount in the aggregate, posing a fundamental challenge to the per-seat SaaS model.

This is starting to become a lot more real. A couple of weeks ago, at their annual Dreamforce conference, Salesforce's CEO Mark Benioff announced a major pivot, at least in their AI product strategy. They are moving away from a per-seat model to a per-conversation model where the company will charge $2 for each customer service or sales conversation held by one of their AI assistants. This shift, in theory, will allow them to continue to thrive as companies begin cutting headcount and amping up investments in AI. For those who have read Clayton Christensen's Innovator's Dilemma, this is a pretty big deal and a brave move for Salesforce.

From the Innovator’s Dilemma:

"In essence, the dilemma is that successful companies often focus on improving existing products or services to meet the demands of their most profitable customers. This focus leads them to overlook or dismiss disruptive innovations, which typically start as lower-quality or niche products but eventually improve and take over the market. By the time the established company recognizes the threat, it is often too late to adapt."

Benioff must have read the book.

More broadly, as we consider an industry shift in this direction, it raises several important questions:

1/ Does it work? Can the AI fully replace a human or is it more of an assistant? Surely, for basic tasks, it will, but how far up the stack of human intelligence will this go?

2/ Given the low cost of supplying this kind of AI once it's built, will customers be willing to pay a price that preserves the revenue and profits generated from the per-seat model, or will SaaS companies take a significant hit? In many ways, this will come down to competition and the proprietary nature of the software. Companies like Salesforce have thrived via their scale and the fact that there wasn't a better place to go. Is AI a real, novel, differentiated technology that can't be recreated, or will it be easy to copy and will margins quickly contract?

3/There's an old saying in software that you can turn any task that you do in Microsoft Excel into a SaaS company (expense reports, project management, budgeting, sales pipeline management, etc.). What's the corollary for AI? Will thousands of point solution AI companies be built around LLMs?

4/ What does this do to white-collar employment? We've seen over the course of history that new technologies disrupt employment in the short term. Though in the long term, the shifts from the agriculture age to the industrial age to the services age to the information age, have led to long term increases in wages and employment. Is it different this time? Will AI get so high on the totem pole of human intelligence that the work humans do is materially reduced? A nice proxy for this might also be the spreadsheet. Prior to the invention of spreadsheet software (VisiCalc in 1979), there were large buildings full of white-collar analysts doing the calculator work that Excel does for us today. That shift only created more analyst jobs because high-quality analysis could be done more cheaply. When something gets cheaper, we typically do more of it.

Just when I thought b2b software was getting kind of stale…here we go again…it seems AI is going to be driving a new platform shift, and it's impossible to know where it all lands. But it's great to see companies like Salesforce protecting their shareholders by resisting the innovator's dilemma and getting out in front of what could be a massive new chapter for b2b tech.

Complexity As A Moat

Judy Faulkner, founder and CEO of Epic, had a good blog post the other day titled More Complex Than Rocket Science where she talks about the complexity involved in healthcare IT. From the post:

"My favorite t-shirt says, “Healthcare IT is more complex than rocket science.” The three Epic employees who used to work in rocket science agree."

Healthcare IT is absolutely super complex. And that complexity creates a ton of challenges for founders trying to get their idea into market. But that complexity is also an advantage in that it creates a moat around a business where it's very difficult for a copycat to come along and recreate what the company is doing. For example, if you're doing automated care management for cystic fibrosis (CF), you need to wrap your head (and your product) around specific nutrition insights, medications, lung function testing, infection management, psychological support, financial aspects of CF care, and then roll that into a service with some technology wrapped around it. And that's just to build a useful product, never mind the challenges associated with taking it to market.

The upside of the pain in taking a healthcare product to market is that often the product/market fit you’ve found is its own moat.

Perseverance As A Competitive Advantage

One of the questions startups frequently get from prospective investors is: why won't the big incumbents (Epic, Cerner, or whoever) just do what you're doing and put you out of business? This is always a difficult question for a founder to answer because the reasons often aren't obvious and can be hard to describe. The difficulty of bringing something new to the market is typically underestimated, and the details really matter. And often, these details aren't well understood by a casual observer. See this excellent post that Chris Dixon wrote back in the day on what he calls the Idea Maze to understand why the answer can be hard to understand from the outside.

I was chatting with an investor last week who had a good way of summarizing why startups have one fundamental advantage over incumbents: they simply can't afford to quit.

For a startup, failure isn’t just a setback—it can mean the end of the business, the loss of investor money, and reputational harm to the founder. This makes persistence almost a necessity.

Large companies, on the other hand, often have a lower threshold for pulling the plug. If a new product doesn’t show quick growth or the market looks small, they cut their losses and move on. For them, it’s just another line item in their budget; for startups, it’s survival.

This urgency forces startups to be more resourceful, nimble, and focused. Where big companies might give up too early, startups are far more likely to push through.

And very often, that’s where the real breakthroughs happen—not because they have more resources, but because they have no choice but to persevere.

Of course, this topic is way, way more complicated. And I'll write more about it at some point. But sometimes, it's simply the refusal to quit that makes all the difference.

Growth Endurance, Benchmarks, & Horizontal SaaS vs. Vertical SaaS

Investors will often refer to SaaS benchmarks to gauge how well their portfolio companies are performing. They'll look at things like growth rate, CAC/LTV, gross margin, EBITDA margin, net revenue retention, etc. They'll often cite the most successful companies like Monday.com, Zoom, Hubspot, ServiceNow, and Zendesk. These are all top-tier SaaS companies, and investors like to have their companies aspire to have similar metrics. 

These companies, and nearly all of the top-tier SaaS companies, have two important things in common:

1/ They can sell into virtually any company in any industry (horizontal SaaS). 

2/ They can sell into virtually any country. 

As an example, in theory, Zoom could sell a license to everyone over the age of 18 with an internet connection — let's call that about 3.5 billion people. So their overall total addressable market (TAM) is 3.5 billion multiplied by, say, $100 per year. So Zoom's TAM is something like $350 billion.

Now consider a healthcare technology company that operates within the complex, highly regulated US healthcare system (vertical SaaS). They have a much smaller TAM than Zoom. There are about 21 million US healthcare workers, so, in theory, if a health tech company could get its product into every healthcare worker’s hands at $100 per year, their TAM would be $2.1 billion, about 0.6% of Zoom's TAM. Obviously, I'm using ridiculously simplistic numbers.

This becomes relevant when we start thinking about benchmarks, particularly with regard to growth and growth endurance (the ability of a SaaS company to sustain consistent growth over time).

Consider Everett Roger's Technology Adoption Curve, which illustrates how different groups adopt new technologies over time. 

You start by acquiring the innovators, then the early adopters, etc. As you move through the curve and gain more and more customers, each sale typically gets more and more difficult. The first two parts of the curve (innovators and early adopters) generally represent about 16% of the addressable market for the technology.

So, using the examples above, when the health tech company gets to 16% of the market, its revenue is $336 million. When Zoom gets to $336 million in revenue, it hasn't even made a dent in the innovators and early adopters. It has another $349,664,000,000 in innovator/early adopter revenue to go get. 

If an investor benchmarked the health tech company against a horizontal SaaS company like Zoom on things like growth, growth endurance, or the cost of acquiring a marginal customer, they'd be very, very disappointed. To say the least!

Now, obviously, it’s on the health tech company to figure out how to innovate, sell its product to a wider audience, and go international, but the point here is that we're not talking about apples to apples. Benchmarks that don't take into account the uniqueness of a business or a particular industry are, at best, a waste of time and, at worst, create really bad incentives for founders and management teams. 

Growth, Innovation, And Knowing Who You Are

On a podcast the other day, Ben Thompson made the point that Meta (Facebook) has taken a lot of heat in that they haven't innovated and built a great new product in a long time. Sure, they have Instagram and WhatsApp, but those were acquisitions, they didn't build those products themselves. 

He made the point that the mistake wasn't that Meta didn't create great new products; it's that they even tried.

Thompson noted that creating big, new products that scale is not only extremely difficult but also almost never works. Of all the ideas that new founders have and that existing companies try, very, very, very few make it. A better strategy for a mature and cash-flush company like Meta is to let its innovative employees leave, raise venture capital, build great products, and acquire the ones that work.

This last point is so important and can’t be overstated. Startups have such an advantage when it comes to innovation.

1/ They have full focus from their best people. When companies get big they have so many competing priorities that have nothing to do with innovation. I imagine a top 3 priority for Meta right now is dealing with international regulators. What an incredible distraction that no startup has to deal with.
2/ Failure isn’t an option. If a product leader inside a large company fails they move on to the next thing. If a startup fails, the company dies.
3/ They have unlimited freedom. They’re not constrained by customer commitments or burdens and processes and systems that were setup in the past. They have full freedom to be flexible and innovate.

All of this is to make a larger point. You have to know who you are. I see this challenge a lot with companies that succeeded through the low interest rate period and are looking to get back to high growth. They look at Rule of 40 and say, let's get to 30% growth and 10% operating margin because investors still favor growth companies over profit-focused companies. Related, see this great chart from Logan Bartlett at Redpoint. It shows the multiple of the importance of growth vs. profitability. In February of this year, the market valued a point of growth 2.9x more than a point of free cash flow. Obviously, it's nothing like it was in 2021, but you can see that investors are still very growth-focused. 

Boards and leadership teams know this and are setting their companies up to plug into higher valuations. But, many of those companies have saturated the market for their core products and don't have a great second act. It's time for many of these companies to flip the switch to a focus on EBITDA and free cash flows. 

Obviously, every company is different. And if you have a great idea and a great team that can execute on innovative growth and the management capacity to go all in and the risk appetite for it, then, by all means, go for it. But remember that we all have egos, and it’s easy to get caught up in what’s exciting versus what we’re capable of and what’s best for the company. We all want to be on the growth side of Rule of 40. Operational efficiency isn't as exciting as launching a giant new product. That's a lot more fun, and you'll get a lot more credit. But it might not be right for you right now. 

You have to know who you are.

Hospitals & Financial Engineering

I haven't written much on the business of healthcare lately, but this Steward Healthcare situation is both fascinating and troubling. For those that haven't been following, Steward recently filed for bankruptcy and is threatening to close hospitals in high-need parts of Massachusetts, and a formal federal investigation into the actions of the CEO and private equity firm that formerly backed the health system seems likely. This news raises real questions about the appropriateness of hospitals operating as private equity-backed for-profits and the financial engineering that comes with such transactions, especially hospitals that operate in underserved communities.  

Steward Healthcare

Steward Healthcare, a for-profit hospital chain, launched in 2010 when private equity firm Cerberus Capital Management (named after Cerberus, the three-legged dog that guards the gates to hell) acquired the failing non-profit Catholic healthcare system Caritas Christi located in Massachusetts. The CEO of Caritas, Ralph De La Torre, became CEO of this new health system. Steward’s name was a symbol of how it promised to be a good steward of the hospitals formerly owned and operated by the Catholic church.

Steward's Strategy

Hospitals might not strike you as a great investment for a private equity firm, so you might wonder what the appeal was for Cerberus. Hospitals have very low margins (generally less than 5%) and sometimes operate at a loss through government subsidies. But Cerberus saw that one could think of Steward, or any hospital chain, as two separate things: 1/ a large hospital operation serving patients and 2/ a highly valuable set of real estate located in population centers that the hospitals sit on. 

Real estate as an investment is a much more lucrative business than a hospital operation. A real estate investment trust (REIT), a company that owns, operates, or finances income-producing real estate, sees 25% to 50% margins. Cerberus saw that Steward could get significant and quick liquidity by selling the real estate that the hospitals were sitting on to a REIT, in this case, a firm called Medical Properties Trust (MPT), and then leasing the property back. This is known as a sales-leaseback. To juice the price of the real estate, Steward agreed to very favorable leases. MPT paid $1.2 billion for the initial properties and also took a 5% stake in Steward. All of the details of these leases aren't clear, but these were expensive, long-term leases with escalator clauses and with other terms that MPT must have liked, including a triple-net lease where Steward would be responsible for the cost of insurance, property management, and maintenance, in addition to the rent.

The strategy was clearly great for MPT as it immediately expanded its assets under management with reliable, lucrative leases. And it was also good, in theory, for Steward. Steward would gain instant liquidity to help it pay down its debt from the Caritas Christi purchase and acquire more hospitals and medical offices across the country. The properties, as they were acquired, were promptly sold to MPT and leased back. And by not being burdened by managing the real estate, Steward could focus on optimizing its hospital operations. 

Steward aggressively pursued this strategy, growing up to 40+ hospitals across multiple US states and even expanding the strategy internationally into Colombia, Malta, and the Middle East.

The problem was that as Steward was rapidly acquiring and selling real estate, much of the proceeds from these real estate sales never got to Steward. Some of it went to hospital operations and paying down debt, but large amounts of it went back to Cerberus in the form of management fees and dividend payments. And that left Steward without much of the proceeds of the sale and with highly burdensome lease obligations. 

Cerberus Exits 

In 2020, Cerberus exited its position in Steward by selling its stake to De La Torre and other Steward physicians via a loan from MPT. Over the course of its ownership, it was reported that Cerberus made a profit of $800M. 

It was downhill from there. Steward quickly began to downsize, selling off hospitals across the country. By January of this year, Steward was facing a financial crisis. It owed MPT $50 million in unpaid rent, among several other vendors. MPT, presumably to keep the gravy train running, stepped up and offered several loans to Steward to keep the health system solvent. It was soon reported that Steward would be forced to file bankruptcy and close a number of hospitals, which then launched a series of investigations into Steward's operations and financials, which brings us to today, where hospitals in high-need areas are at risk of closing, creating a potential public health crisis in Massachusetts. 

What's Next

What happened here, in short, is a smart private equity firm saw an opportunity to buy up a struggling health system for small dollars, sell off the valuable real estate it sat on, and maximize those sales by saddling it with costly leases and using the proceeds from the sales to pay itself and expand this strategy across the country and the world. Then it sold off the entire asset, leaving the real estate owner (MPT) and Steward's management and employees in the lurch.

To be clear, It's not obvious that any of this activity is illegal (it's probably not). And in most industries, you could argue business is working as it should. Steward likely wasn't a great business at the start, and finding a way to maximize the assets of an investment seems like good old-fashioned capitalism. If Steward was a tech company or an apparel company, it’s likely nobody would know about this mess.

But it's not. It's a health system that operates dozens of hospitals in high-need areas. Hospitals that represent our society at its best. These are places of healing for humans facing the worst moments of their lives. They restore health, reduce human suffering, and support the overall well-being of the communities in which they operate. Not to mention, they generally receive at least half of their revenue from tax payer-funded healthcare. Because of that, I think regulation of these kinds of transactions and even for-profit hospitals, in general, are set to receive some intense scrutiny from regulators in the coming months. De La Torre is scheduled to testify in front of Congress in September.

I'm a big fan of capitalism, and I generally support the work of private equity firms in delivering returns to their shareholders, many of which are large pension funds, endowments, and foundations. But Steward's collapse is an important signal that our most important and prized institutions shouldn’t be operated as attractive targets for short-term, financially engineered profits.

Hospitals are different. They're a special thing. And regulators should ensure they're treated that way.

Incentives, incentives, Incentives

"Show me the incentive and I will show you the outcome" - Charlie Munger

I’ve found that when you think understanding incentives is really, really important, you still don’t understand how important it is. When you find yourself in a difficult conversation or challenging situation with an employee, a customer, a partner, or a vendor, pause and make sure you understand the incentives of all the stakeholders. It almost always gives you instant clarity and gets you unstuck.